Great Debates in Contract Law

Jonathan Morgan

• Publisher: Red Globe Press
• Year: 2020
• ISBN:
  9781352009996
• Edition: 3
• Topic: Law
• Subtopic: Contract Law
• Index: Law

This textbook is an engaging introduction to the more advanced writings on contract law, primarily designed to allow students to 'get under the skin' of the topic and begin to build their critical thinking and analysis skills. Each chapter is structured around key questions and debates that provoke deeper thought and, ultimately, a clearer understanding. This edition has been extensively rewritten to include new cases and scholarship throughout. New sections include 'no oral modification' clauses, substantive fairness, regulation of standard-form contracts, and remoteness of damage in contract.

An excellent book for students of contract law who wish to know more, the aim of the book is not to present a complete overview of theoretical issues in contract law, but rather to illustrate the current debates which are currently going on among those working in shaping the area. The text features summaries of the views of notable experts on key topics and each chapter ends with a list of guided further reading.

CHAPTER 1

Formation of Contract

Debate

Does the law on offer and acceptance respect the parties’ intentions?

Contracts are voluntarily assumed legal obligations. This seems so obvious that it is usually assumed to go without saying. Yet do the very rules which determine whether the parties have reached agreement respect the intentions of the parties? At the general theoretical level, the ‘objective principle’ may lead to contracts which diverge from the inner ’subjective’ intentions of one (or even both) of the parties. At the technical doctrinal level, the rules on offer and acceptance may also apparently defeat the parties’ ‘true intentions’. In this debate we examine these claims.

A SUBJECTIVE OR OBJECTIVE APPROACH?

Classically, a contract is said to be a ‘meeting of the minds’ or ‘consensus ad idem’. But it is questionable whether English law has ever taken this particularly seriously. The modern law of contract is the product of nineteenth-century treatise writers, who first attempted a ‘full-blooded’ theorisation of the law, heavily influenced by the French jurist Pothier.¹ His central idea was that contractual obligation stems from the mutual assent of the parties. But as David Ibbetson comments, basing liability on the parties’ intentions was satisfactory in theory but problematic in practice. All too often ‘what appeared to be a perfect agreement concealed a more ragged mixture of things on which the parties agreed, and things to which one or both of them had given no thought’.² Moreover, what of the party who gives every outward sign of assent but whose inner (‘subjective’) thoughts are quite different? How are such inner thoughts to be proved?

To avoid such practical problems, the common law has committed itself to an objective theory of contract formation, which John Wightman describes as a ‘vehicle of compromise’ between the will theory and commercial convenience.³ Objectivity denies strength to any ’secret reservations’ that the parties might have.⁴ As Holmes put it, ‘the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs – not on the parties having meant the same thing but on their having said the same thing’.⁵ According to Joseph Perillo, this has been the basic approach since time immemorial, apart from ‘a brief but almost inconsequential flirtation with subjective approaches in the mid-nineteenth century’.⁶ It was memorably restated by Blackburn J in Smith v Hughes:⁷

If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.

The clear rationale for the objective approach presented here is to protect the position of the other party, who may reasonably have relied on the outward appearance of willingness to contract. As Adam Smith had argued in his lectures of 1762û1763, an apparent promise should be binding (irrespective of the will of the promisor) because it produces ‘the same degree of dependence’ as one actually intended.⁸ Thus, as J.R. Spencer argues, words or conduct are given the meaning that would be assigned by a reasonable person in the position to whom they were addressed.⁹ To protect reasonable reliance on outward appearances, the law must always take the perspective of the ‘observer’ rather than the ‘actor’.¹⁰

This ‘reasonable observer’ approach requires ‘quite a complex amalgam of the objective and the subjective’ in order to determine ‘what each party intended, or must be deemed to have intended’.¹¹ The reasonable observer would not rely on the appearance of agreement when he ought to realise that the actor’s true intentions did not go with the appearance. As Mindy Chen-Wishart points out, this is not a ’subjective exception’ at all, but the consequence of observer objectivity. The hypothetical reasonable observer sometimes ought to realise when the actor does not mean what she appears to say; if the mistake is reasonably obvious then there can be no contract. ‘This is … an application of the objective theory of contract, not an exception to it.’¹² Of course, if the observer actually knows that the actor’s intention did not correspond with appearances the situation is a fortiori, but that does not mean the test becomes subjective. Hartog v Colin & Shields shows that either actual or deemed-because-reasonable knowledge will do.¹³

A second point is that when the observer is responsible for divergence between the actor’s intention and appearance, he cannot hold the actor to the appearances. This is illustrated by Scriven v Hindley, where the auctioneer’s misleading display of the auction lots induced a mistaken bid: as Lawrence J said, the auctioneer could not under such circumstances ‘insist on a contract [against the bidder] by estoppel’.¹⁴

And it has often been observed that the objective principle ultimately rests on some kind of estoppel – preventing the denial of an apparent agreement. Lord Diplock argues that:

The rule that neither party can rely upon his own failure to communicate accurately to the other party his own real intention by what he wrote or said or did, as negativing the consensus ad idem, is an example of a general principle of English law that injurious reliance on what another person did may be a source of legal rights against him.¹⁵

But if the principle were truly based on estoppel, then actual action in reliance on the outward appearances would be necessary. The fact that apparent agreement may always potentially generate reliance would be insufficient. Second, there would be important implications for remedies. It might seem more appropriate to compensate irreversible detriment incurred in reliance on the apparent agreement than to enforce it. But in fact, neither of these positions obtains in English law.

In Centrovincial Estates v Merchant Investors Assurance the plaintiffs by letter offered to lease premises to the defendants for £65,000 per annum.¹⁶ But this figure was erroneous – the plaintiffs had intended to state £126,000. The defendants wrote back formally to accept the proposed £65,000 offer. The plaintiffs, realising their mistake, immediately telephoned to inform the defendants that they had meant to say £126,000, but the defendants held them to the original offer. In the Court of Appeal the plaintiffs argued that (on the assumption that the defendants had, reasonably, not realised the plaintiffs’ mistake) there was no binding contract as a consequence of mere acceptance. In addition, they submitted, the defendants had to alter their position in reliance on the offer, to estop the plaintiffs from withdrawing it. This submission fell on stony ground. Slade LJ held that as soon as the offer was accepted there was a binding contract, provided it was accompanied by good consideration. This could be satisfied by the offeree promising as to his future conduct, and therefore it was ‘nothing to the point that the offeree may not have changed his positio...